Working it out

Sub- or non-performing loans require a different mind- and skillset to optimize recovery, compared to monitoring and managing performing loans. This applies both if assets still sit on the balance sheet of the original lender or on that of an investor who has purchased a portfolio. The difference lies primarily in how information is collected, captured and utilized to assess, define and execute applicable resolution strategies. This article will explore the fundamental steps and activities involved in workout management of distressed assets and present some best practice principles.

Focusing on Real Estate related loans, the additional steps and activities required to manage sub- and non-performing loans can be summarized in Table 1.


Throughout these steps, a large amount of information is collected in various shapes and forms. Capturing this information in a systematic manner facilitates reporting and decision making and allows stakeholders to track evolution over time. In many instances however, reporting involves a significant effort where individual case managers have to go through emails, reports, handwritten notes and excel spread sheets in order to give a reliable update to their stakeholders. This can itself create value drain down the line if a case manager leaves or when an exposure is finally realised, for example via the sale of the asset, where relevant datasets are not complete or consistent.

Technical requirements

Significant efficiency can be achieved and value generated by having responsible case managers work on a robust IT platform that integrates all information on the borrower, loan and collateral (asset) in one. This becomes especially critical when it comes to managing hundreds or thousands of loans, borrowers and assets.

An IT platform that integrates all the necessary tools to efficiently capture, monitor and manage sub- and non-performing loans and underlying collateral, furthermore enables fluent reporting to stakeholders. Critical up-to-date information regarding portfolio status, case status, cash recovery, budgets for future periods, LTV development, progress tracking, operational KPIs etc., become accessible in real-time. This element is especially important for private equity investment managers who have to fulfil certain reporting and governance requirements and obligations towards their investors.

Ownership and incentives

In addition to having at hand relevant systems that capture information, it is important that cases are managed with clear and defined ownership. At each point when a case moves between teams (e.g. from a credit department to a workout team or into legal), lack of ownership and continuity can result in the case becoming temporarily orphaned. One way of assuring ownership is to find the right way to incentivise the team or person that is to become responsible for the resolution and have them follow it throughout.

It can be hard for banks to accept the concept of rewarding a loss-making or even noncore activity within its organisation, but not doing so may have even worse consequences.


Table 2 (above) shows a typical example of the process a case undergoes when moving from performing to underperforming and eventually through to restructuring, enforcement and beyond.

First of all it is important to involve the workout team as early as possible and have them take the responsibility for the case as it evolves. Secondly, the further along in the process a case moves, the fewer tools are available to implement an amicable resolution strategy. It can be costly to miss opportunities to resolve a case early on and it can easily be demonstrated that the resolution options not only diminish, but the time and cost, both internal and external, increase as the case progresses.

Consensual vs Confrontational resolutions

When cases are identified early on in the process, the likelihood of reaching a consensual arrangement with a borrower increases, and often this can be the most optimal route to resolution. Such strategies need to be well prepared and clearly communicated so that time is not lost. This requires that the case managers do their homework in order to understand the nature of the distress and successfully identify options for recovery.

Once this has been done, intellectual negotiations can start with the borrower and other stakeholders that involve an open discussion on the possible options and what actions will be taken at each step. Such open communication can expedite the process and facilitate earlier recovery. Giving the borrower a fair chance to rectify the situation in a consensual way also strengthens a case going forward, especially if legal action needs to be taken at later stage.

What can go wrong? What has gone wrong?

In complex situations that involve multiple assets, asset categories, legal jurisdictions, currencies, cross collateralisation, interest rate swaps, co-lenders and tenants, there is actually quite a lot that can, and will, go wrong. Each party is driven by different agendas.

It is critical to have an early detection mechanism that triggers actions and ensures ownership of those actions, so that potential problems can be managed pro-actively rather than reactively. What has gone wrong in practice is that such processes have not been applied and people with relevant experience have not been engaged or given the right tools, whether systems or incentives, to efficiently resolve such situations.

This can result in ad-hoc reactive strategies which are implemented too late in the recovery process when fewer tools are at hand. In some instances troubled cases have been handled like “hot-potatoes” thrown between departments and teams and even fallen between the desks, resulting in further deterioration of value and loss of time.

Best practices and key learning points

On operations and organisation:
• Banks e.g. staff and infrastructure, are traditionally not well equipped for workout management
• Retaining key staff and recruiting new staff with hard asset and transactional experience is crucial
• Incentivise and align the team
• Invest in IT infrastructure and get your data organised
• Streamline and simplify decision making

On workout strategy and approach:
• Be proactive – be first on site
• Get your facts straight – dig deep
• Focus on the underlying asset
• Explore consensual arrangements before legal routes
• Think like equity and not like debt
• Senior bank is King – make friends, not enemies
• Know when to throw in the towel – and never, ever throw good money after bad